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Business Consulting

5 Effective Exit Strategies When You Decide to Close Your Business

Closed sign representing exit strategies for closing a business

When starting a business, exiting it is the last thing on your mind, but nobody can work forever. Every business owner will need to devise an exit plan at some point in their career, and it’s never as simple as shuttering the doors and walking away.

There may be circumstances when you no longer wish (or are no longer able) to carry out your duties as a business owner. These may include:

  • personal reasons like a health or family crisis,
  • financial reasons such as debt or retirement, or
  • business reasons such as a sustained drop in profits, new competition, or economic crisis (as, unfortunately, many small businesses closed down during the pandemic).

A business is an entity separate from you. It has its own investors, employees, customers, tax filings, and accounts. A successful exit strategy needs to protect your investors and employees and hopefully generate substantial profit for you. You can change the strategy depending on the scale of your organization.

In this article, we will talk about some effective exit strategies and how to choose the right one.

How to Prepare an Exit Strategy? 

While preparing an exit strategy, assess your business and financial goals with a skilled business and personal financial advisor before making any decisions. This will give you a picture of your options and may help to determine which approach you want to adopt. Ideally, entrepreneurs should consider exit strategies even at the outset of starting a business, so they can strategize towards that goal throughout the life of the company.

Generally, those exiting their business are looking for one of two outcomes (or a combination of both):

  • Lifestyle approach – where you want to maximize your returns from exiting the business
  • Legacy approach – where you want the legacy of your business to continue

Once you have your goal, weigh in the pros and cons and select the one that meets your objective. There are three popular ways to exit your business; selling, closing and going public. The first one adopts the legacy approach, while the other two adopt the lifestyle approach.

Five Effective Exit Strategies 

Below are the five of the most common exit strategies:

1. Sell the Business to Family or Friend 

Many people looking to retire and exit the business they’ve created want to pass the legacy on to their children or family members. If that is your exit strategy, it’s wise to bring those people into the business well before you leave, so they can learn the ropes and ensure a smooth succession. You will be there to act as an advisor, before handing things over to the new generation.

For more information on the financial impact of selling a business to family, see our previous blog on potential upcoming changes to make this transition more manageable and less costly.

2. Sell the Business to Management or Employees 

Not every business owner has children or family who are interested in carrying on the family legacy. In these cases, you might want to sell the business to the existing employees, management, partners, or investors. If you have this goal in mind from the start, you can chart out a stock equity plan for management or employee buyout at the start of the business.

When employees and management know that they may have an ownership stake in future, they will be motivated to grow the business and be loyal to the company. As they already know the challenges and opportunities of the business, they are skilled to take over. You can continue to stay on in an advisory capacity, earn fees and retain some shares.

3. Mergers and Acquisitions 

The above two strategies are good for legacy but not as ideal for lifestyle. If you want a better return when exiting your business, you might consider a merger and acquisition (M&A) deal in which you sell your business to an unrelated entity. The challenge here is to find an acquirer that is a strategic fit for your business and can offer you a premium for your asset.

A company might be motivated to buy your interest in order to acquire your product, customers, and employees, or to remove you as competition. In the first three cases, you might fetch a premium for your business, and the deal might benefit your investors and employees. However, the last case might not bode well for investors and employees.

If you want to stay actively involved in the business, you might consider a merger, as you can hold a managerial position in the merged company. But if you want to completely cut ties or have a passive involvement in the business, you might consider a cash and stock acquisition. The M&A will be fruitful if you have a profitable business with significant goodwill.

4. Initial Public Offering (IPO)

The most profitable exit strategy is going public with an initial public offering (IPO). Many start-ups develop their business with the goal of eventually listing themselves on the stock market. A public company enjoys higher growth but at the same time has higher compliance and reporting standards. Any accounting irregularities or failures in disclosure could subject the owner to prosecution.

Hence, you have to plan for an IPO from the start as you need a sizeable growing business that appeals to the public. An IPO is time-consuming and heavy on procedure. Before going public there are many steps to take, and you’ll need a skilled advisor to guide you through the process. IPOs aren’t for every business, but when they are, they can result in high reward.

This is a long-term goal, and not a good strategy if you want to exit quickly.

5. Liquidation 

Not everything goes as planned. If your business is not profitable and you have debts to pay, liquidation may be the best or only resort. This is the simplest and fastest way to get your money out and pay off creditors. When liquidating a business, you end your business operations and sell off all the assets, usually at a loss.

Liquidation can also be a solid option if your business is profitable. You can liquidate your assets over time by drawing a larger salary or dividends over several years until the business funds dry up. But this strategy will attract higher income tax and may not be welcomed by employees and investors. Liquidation in this form may be a better strategy for a one-person operation.

Contact Sloan Partners LLP in Toronto for Strategic Exit Strategy Advice for Business Owners

Every strategy has its purpose. Choose the one that aligns with yours. The business consultants at Sloan group can help you select and implement the right exit strategy for your circumstances. Speak to one of the experienced tax practitioners at Sloan Partners LLP before making any hasty decisions.

At Sloan Partners LLP, we advise businesses on a variety of issues, including winding up and succession planning. We work directly with business owners as well as small and medium accounting Firms to implement tax planning strategies and achieve the most favourable tax results for small business owners and their families. If you would like to discuss how you can make a tax plan that will better benefit your family and/or business, contact us to schedule a consultation. Please reach out to us online, or by phone at 416-665-7735.

 

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